Earnings Preview – Ciena Corp.

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On Dec. 13, Ciena Corp. (NASDAQ: CIEN) will release fiscal fourth-quarter results. The company operates in the volatile telecom equipment sector, producing networking equipment alongside companies such as Cisco Systems (NASDAQ: CSCO) and Tellabs (NASDAQ: TLAB). Expectations are that net losses persisted through the latest period, due to lower margins in its services business, high start-up costs in the switching operations, and a lower-margined product base. Analysts are looking for a share loss of $0.23 for the quarter. The shares, priced at just under $15 at time of publication, may still hold promise for aggressive investors, though.

Hopes for at Turnaround

Management is banking on several factors to support a resurgence of the bottom line in 2013. For one, once initial deployments of projects are completed, the profitability of the services unit could bounce back, along with growth in related software sales. But, during next year, it will also be rolling out next-generation architecture with Tier 1 companies, initiatives that will probably add to operating costs and R&D.

A Changing Industry

Ciena’s core end markets, the delivery of voice, video, and data communications, is in a broad transition occurring over a multi-year span that has been highlighted by heightened usage of networks by consumers and businesses. The expansion by telecoms into higher-speed broadband offerings for improved efficiency is driving demand for Ciena’s product lines. This includes the proliferation of items such as smartphones and tablets. Telecoms are apt to continue to look for ways to service those clients with more highly automated systems. Thus, over time the need for network-accelerating equipment, services, and software will probably climb.

Certain catalysts supporting this view include a shift of data to the cloud and the increased need for mobility. Ciena’s product line could well be suited to benefit from such upgrades. Its offerings target customers seeking more rapid transmission speeds, improved efficiency, and the potential for greater bandwidth requirements. Specifically, it offers Packet-Optical switching, Packet-Optical Transport, and Carrier Ethernet solutions. And, in aiming to reach another portion of the telecom market, its software is built for the unified communications aspect of the current telecom sector, in addition to consulting, planning and design features.

Cisco is most prevalent in the switching market, where its sales are down only slightly. It introduced numerous new products in this category during 2012, and thus may gain further headway. Also, it is in the process of building its unified communications product portfolio. Shares of the industry giant have been on the rise, in part because of its July buyout of NDS Group Ltd.  

Tellabs, under brand new CEO Daniel P. Kelly, a products expert, could potentially upgrade its product lines in the Broadband market and place additional pressure on Ciena. TLAB, too, operates in the Transport market, but its 7100 packet-optical system has been slowing in terms of sales. Investors should take a wait-and-see approach, given the new leadership and the company's stream of red ink this year.  

In large part, telecoms are pursuing reduced costs for the deployment of their next-generation networks, while continuing to roll out new services at a fast pace. Ciena and other equipment producers are developing systems for those purposes. Within the equipment industry, there is now a tough competitive landscape. In the recent past the company has made efforts to reduce its exposure to the pitfalls of this setting. For instance, in 2010 it acquired all the optical networking and Carrier Ethernet assets of Nortel’s Metro Ethernet Networks business. The buyout helped to boost its revenue from an annual $1.2 billion in 2010, to $1.7 billion in 2011.

Strategy

One way Ciena would like to expand over the long run is through global market entries. It is mentioning Brazil, Russia, the Middle East, Japan, and India. Moreover, it wants to grow its portfolio of advanced professional services that aim to enhance network productivity. The coinciding of its research and development activities with clients' planned deployments, as well as a greater focus on promotion, and internal operating efficiency gains, are stated goals.  

Finally, if Ciena can navigate through the current year, it might well have positive trends on the near-term (one-year) horizon. Those investors with a penchant for more risky investments could potentially be rewarded.

 


dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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